In my inaugural blog post, I attempted to explain why the price of gold was not only viable at the current level but likely to rise. Since then, and I must admit that three weeks is a very short horizon, the spot price of gold has increased by 4%, from $1,731 per ounce to almost $1,800 per ounce and reaching a high intraday trade of $1,799.60 last Tuesday. Gold futures, meanwhile, rose above $1,800 an ounce on Tuesday, closing at the highest level since September 2011, with gold for August standing at $1,809.90 l ‘ounce. In short, it is a very good time to invest in gold as an asset. It’s an even better time to invest in gold stocks.
I say this for several reasons. First, the purchase of physical gold in the form of gold coins, gold bars, or any other form of gold, or any instrument representing a unit of gold, is immutable, although the value of the unit will depend entirely on the price of gold alone. If the price goes up, we collect the difference – end of the story.
In contrast, stock in a gold mine brings the value of the gold currently in the ground or being produced, plus the value of any increase in the resources in place or production. This is a powerful catalyst in an environment where the price of gold is rising. This multiplier effect arising from the higher price of gold and higher resources in place or production, or both, can create significant upsides in value, in that the higher price of gold is multiplied not only by the initial level of resources or production but also by the increase in resources and production. This boost effect can be really interesting!
Just look at our Jacobina mine to see how this can materialize. On February 14, 2019, we forecast annual production of 145,000 ounces of gold from this mine. At the time, gold was trading at $1,312 an ounce. We subsequently increased our forecast to 152,000 ounces, which Jacobina exceeded by producing 159,000 ounces for the year. By then the price of gold had risen to $1,517 an ounce, so the value of the mine was not only boosted by the 16% rise in the price of gold, but also by the 10% increase in production. This multiplier effect has only accelerated since then, with the price of gold continuing to climb and Jacobina raising its 2020 production forecast to a range between 162,000 and 168,000 ounces.
Another benefit of gold stocks is yield. Physical gold does not pay a dividend or any form of cash yield, but many gold companies do. We certainly do! In a favorable gold price environment, when cash flow and cash balances are on the rise, gold companies are more likely to increase their dividends. This has been the case for us, as we have increased our dividend three times in the past 12 months alone, for a cumulative increase of over 210%.
Investing in gold stocks is certainly riskier than investing in physical gold. Gold miners are exposed to operational risks whereas the only risk of investing in physical gold is price. The dividend yield should be considered in part as an offset to the risks associated with this type of investment. Therefore, the question to ask is: are we getting enough reward, in an environment where the price of gold is rising, when we invest in gold stocks? I think my opinion on this is pretty clear, and there is still time to take advantage of the first phase of the cycle. So far, investors remain underweight in gold stocks.
And while I recognize that I may have a slight bias, if investors choose to allocate capital to gold stocks, they should consider a company like Yamana, with its portfolio of high-quality assets in jurisdictions favorable to mining, its track record of dividends, and overall returns, its solid balance sheet, its organic growth prospects, and its growing cash flow.